Financial literacy and international portfolio diversification

Despite the well-documented benefits of international portfolio diversification, empirical studies highlight a persistent investors’ preference for domestic assets, a phenomenon known as home bias. This paper investigates how financial literacy is related to household investment behavior, with a focus on its association with home bias and participation in international financial markets. We use representative Italian data collected in 2020 by the Bank of Italy through the Survey of Household Income and Wealth (SHIW) to explore the relationship between financial literacy and international investing. We find that basic financial literacy significantly increases both the likelihood of investing in foreign markets and the share of the financial portfolio allocated to international assets. Specifically, being financially literate is associated with a 9.9 percentage point increase in the probability of investing internationally and a 6.2 percentage point increase in the share of the portfolio allocated to foreign investments, among households that own financial assets. These findings highlight the critical role of financial literacy in mitigating investment risk through international diversification, hence fostering resilient investment portfolios.